Close Companies: What Limited Company Owners Need to Know

If you own and run a small limited company, there is a good chance your company is a close company.

This is not a new type of company.

It is a tax term used by HMRC, and it is becoming more important because HMRC is asking for more information about close companies, dividends and transactions between companies and their owners.

From the 2025/26 Self Assessment tax return, directors of close companies must provide HMRC with more detailed information about their company, dividends and shareholding.

HMRC has also consulted on wider reporting requirements for payments and transactions between close companies and their owners.

The key message is simple:

If you own and control a small limited company, you need to keep clear records of how money moves between you and the company.

What is a close company?

A close company is broadly a company controlled by:

• five or fewer participators; or

• any number of participators who are directors.

A participator is usually a shareholder, although the definition can also include someone with another type of interest in the company’s capital or income.

In simple terms, most small owner-managed companies are close companies.

For example, your company is likely to be close if it is owned and controlled by:

• one director-shareholder;

• a husband and wife;

• family members;

• two or three business partners;

• or a small group of shareholders who also run the company.

This means that many small limited companies will fall within the close company rules, even if the directors have never heard the term before.

Why does the close company distinction matter?

The close company rules matter because HMRC treats companies controlled by a small number of owners differently in certain areas.

This is because the same people often control both sides of the transaction.

In a small owner-managed company, the director may also be the shareholder. This means the director can decide:

• when salary is paid;

• when dividends are declared;

• whether money is taken as a director’s loan;

• whether personal costs are paid by the company;

• whether assets are transferred between the company and the owner.

This creates more risk of mistakes.

It can also make it easier for company money and personal money to become mixed.

HMRC is particularly concerned where owners do not clearly distinguish between:

company money and personal money.

A limited company is a separate legal entity. The company’s money does not personally belong to the director or shareholder until it is properly taken out in the correct way.

How can money be taken from a close company?

Money can usually be taken from a limited company in several ways, including:

• salary;

• dividends;

• repayment of expenses;

• repayment of money owed to the director;

• pension contributions;

• benefits;

• director’s loans;

• or other distributions.

These are not taxed in the same way.

For example, salary is processed through PAYE.

Dividends are paid to shareholders from profits available for distribution.

A director’s loan is money borrowed from the company or owed back to the company.

Each category needs to be recorded correctly.

If money is taken from the company and no one is clear whether it is salary, dividend, expense reimbursement or loan, this can create tax problems.

Dividends need to be properly recorded

Dividends are one of the main reasons the close company distinction is now so important.

A dividend is a payment to shareholders from company profits.

It is not salary.

It is not a business expense.

It is not deductible for Corporation Tax.

A dividend should only be paid if the company has enough profits available for distribution.

This means directors should not look only at the bank balance.

The company may have cash in the bank but still have liabilities, such as Corporation Tax, VAT, PAYE, supplier balances or loans.

Before paying dividends, directors should consider whether the company has enough distributable profits.

The company should also prepare proper dividend paperwork, including:

• board minutes;

• dividend vouchers;

• shareholder details;

• the amount paid;

• the date of the dividend;

• the share class;

• and how the dividend was paid or credited.

This matters more now because HMRC will receive more company-specific dividend information from directors’ personal tax returns.

New Self Assessment reporting requirements from 2025/26

From the 2025/26 Self Assessment tax return, directors of close companies must provide additional information to HMRC.

Where a director is completing the Employment pages of the tax return, the form asks whether the company was a close company.

If it was, the director will need to provide:

• the name of the close company;

• the company registration number;

• the dividends received from that close company;

• the percentage shareholding in that close company.

HMRC’s notes say the shareholding should be based on the total percentage of share capital owned, calculated by reference to the nominal value of the shares, and should be the highest percentage held during the year.

This means directors will need accurate information before their personal tax return is prepared.

Why HMRC wants this information

Previously, HMRC could see the total amount of dividend income reported on a personal tax return.

However, it was not always clear whether those dividends came from the director’s own company, from listed shares, or from other investments.

The new questions give HMRC more detail.

HMRC will be able to see:

• which close company paid the dividend;

• how much dividend income came from that company;

• what percentage shareholding the director had;

• and whether the director has correctly identified the company as close.

This makes it easier for HMRC to compare the director’s personal tax return with the company’s accounts, company tax return and other records.

Proposed wider reporting requirements

HMRC has also consulted on wider reporting requirements for close companies.

These wider rules are proposals only and are not yet in force.

The consultation looked at whether close companies should be required to report more detailed information about transactions between the company and its participators.

This could include:

• cash withdrawals;

• bank payments;

• loans;

• debts;

• dividends;

• other distributions;

• sales of assets to the company;

• purchases of assets from the company;

• transfers of assets;

• and other transfers of value.

HMRC is also considering what details should be reported.

At a high level, this could include:

• who received the payment or benefit;

• the amount;

• the date;

• and the type of transaction.

The method and frequency of reporting have not yet been decided.

HMRC has suggested that reporting could potentially be linked to the Company Tax Return, CT600A, or a separate digital process.

The important point is that this is the direction of travel.

HMRC wants a clearer picture of how money and value move between close companies and their owners.

Director’s loan accounts will become even more important

The director’s loan account is one of the key records for a close company.

If a director takes money from the company and it is not salary, dividend, expense reimbursement or repayment of money owed, it may be treated as a director’s loan.

This is not automatically wrong.

But the loan account needs to be accurate.

The company should be able to show:

• how much the director has taken;

• how much has been repaid;

• whether any dividends have been credited to the loan account;

• whether the loan is overdrawn at the year end;

• whether any section 455 tax may apply;

• and whether any benefit in kind reporting is needed.

If the proposed reporting requirements are introduced in future, the director’s loan account may become even more visible to HMRC.

Close companies and loans to participators

Close companies already have special tax rules for loans to participators.

A participator is usually a shareholder.

If a close company makes a loan to a participator and the loan remains outstanding more than nine months after the end of the accounting period, the company may have to pay a section 455 tax charge.

The company may also need to complete supplementary page CT600A with its Company Tax Return.

If the loan is later repaid, released or written off, further tax consequences and reporting may apply.

This is another reason why the close company distinction matters.

It is not only about dividends.

It also affects loans, debts and other ways value can pass between the company and its owners.

Proposed reforms to the distributions framework

HMRC is also consulting on wider reforms to the taxation of distributions and repayments of capital from companies.

This is a separate consultation.

It looks at areas such as:

• distributions to shareholders;

• repayments of capital;

• interaction between distributions and loans to participators;

• purchase of own shares rules;

• transactions in securities;

• and other shareholder extraction issues.

These reforms are not yet law.

However, they show that HMRC is reviewing how shareholders take value from companies and whether the current rules remain suitable.

For small limited company owners, the practical message is the same:

records need to be clear, accurate and up to date.

What should limited company owners do now?

Limited company owners should not wait until the tax return deadline to sort out dividend and loan records.

A good starting point is to check:

• whether the company is a close company;

• who the shareholders are;

• what percentage shareholding each person has;

• whether the shareholding changed during the tax year;

• what dividends were paid;

• whether dividend vouchers were prepared;

• whether board minutes were prepared;

• whether dividends were paid from available profits;

• whether any dividends were credited to the director’s loan account;

• whether any money taken by the director has been posted correctly;

• whether any personal costs were paid by the company;

• whether any loans to shareholders or connected persons exist;

• whether the company may need to complete CT600A.

Common mistakes to avoid

Limited company directors should avoid:

• assuming their company is not close because they have never been told it is;

• treating company money like personal money;

• taking dividends without checking available profits;

• failing to prepare dividend vouchers and board minutes;

• reporting dividend figures that do not agree with company records;

• ignoring changes in shareholding during the tax year;

• posting drawings to dividends without checking whether dividends were properly declared;

• allowing the director’s loan account to become unclear;

• paying personal costs from the company without considering the tax treatment;

• and waiting until year end to work out what has been taken from the company.

Practical example

Anna is the sole director and shareholder of Anna Consulting Ltd.

Because she owns and controls the company, the company is likely to be a close company.

During the 2025/26 tax year, Anna takes a monthly salary and several dividends.

When her Self Assessment tax return is prepared, she will need to confirm that the company was a close company and provide the company name, company registration number, dividends received from the company and her percentage shareholding.

If Anna’s dividend vouchers show one figure, the bookkeeping shows another figure, and her director’s loan account shows something different, this could create problems.

The records need to agree.

This is why dividends should be approved, recorded and reviewed during the year, not recreated after the year end.

Final thoughts

The term “close company” may sound technical, but it affects many small limited companies.

If your company is owned and controlled by you, your spouse, your family or a small number of shareholders, it is likely to be close.

This matters because HMRC is asking for more information about close companies, dividends and shareholdings from the 2025/26 Self Assessment tax return.

HMRC has also proposed wider reporting requirements for transactions between close companies and their owners.

Those wider requirements are not yet in force, but they show the direction of travel.

The key point is this:

Limited company owners need to keep better records of dividends, director’s loans, shareholder transactions and money taken from the company.

At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances.

HOME

Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.